Vietnam and Thailand

Coping with Regional Integration and Chinese Challenge in Different Ways Kenichi Ohno (VDF & GRIPS) March 24, 2005

Background

 VDF and MOI have been cooperating in policy research since VDF started  To study methodology, procedure, content and adjustment of industrial policy making under global integration  VDF presented its views to H.E. Minister Hai and MOI high officials (Feb. 25, 2004)  VDF-MOI joint mission to Thailand (Feb.28 Mar.4, 2005)

Today’s Menu: How Thailand Does It

 Overview  Top-down liberalization and general support  National positioning  Policy formulation with private involvement  Automobile master plan  SI and SME promotion  Glass ceiling problem

Why Thailand?

 Similar population size

(61 million)

 Income level of

$2,291

, a reasonable target for Vietnam 2020 (currently $481)  High manufactured export ratio

(76%)

 Excels in two key industrial products --Electronics exports --Automobiles and motorcycles

VDF Proposal (Feb. 2004):

Vietnam’s Targets for 2020

1.

2.

3.

4.

5.

Relative income

— join the middle group (China + ASEAN4)

Export structure

— Manufacturing is (75%) or more

Selected leading status

— Vietnam becomes No.1 or No.2 exporter in the world for a few high-tech items, based on industrial agglomeration and high quality

Supporting industries

— significant amounts of parts and inputs are domestically produced (but not 100%)

Supporting services

— domestic skilled labor provides a large part of design, production management, marketing, etc. replacing foreigners

Manufactured Exports

(% of total exports)

100% 80% 60% Thailand Top Group 2nd Group 40% 20% Latecomers Vietnam 0%

Source: ADB,

Key Indicators of Developing Asian and Pacific Countries

, 2003/2001/1993; IMF,

International Financial Statistics Yearbook 1990

.

For Japan,

Japan Statistical Yearbook 2003/2002/1999

, Statistics Bureau/Statistical Research and Training Institute, Ministry of Public Management, Home Affairs, Posts and Telecommunications, Japan.

Japan Taiwan Korea Singapore China Malaysia Thailand Philippines Indonesia Vietnam

Problems with Thailand

Vietnam should avoid these Uncontrolled urbanization:

 Too much concentration in Bangkok  Traffic congestion  Urban-rural income gap does not narrow

Even after 40 years of FDI-led industrial growth,

 Lack of high-skilled labor and slow technical absorption  Weak local supporting industries (dominated by FDI parts producers)

Topic 1

Top-down Liberalization and General Support

 Thaksin Government (2001-05, 2005-09)  Top-down decision making (unlike past) PM Order  Ministries to work out details  Run a country like a business enterprise --Results oriented --Quick action & response --Attractive slogans for marketing Thailand --Administrative reforms for efficiency

Key Policy Directions

1. Aggressive liberalization --

Lead

global & regional integration by free trade & FDI initiatives --No preference for nationality of enterprises operating in Thailand (foreign or local) 2. Increase domestic capability --Not just export promotion, but increase domestic value and employment --Nondiscriminatory SME & SI promotion (for local or foreign, large or small firms)

Topic 2

National Positioning

--How to cope with Chinese challenge?

--How to take advantage of globalization and regional integration?

Thai answer is relatively clear (at general level)  Target industries with high domestic value added  Find global market

niche

competition with China) (avoid direct

Targeted Industries

    Automobile and parts (“Detroit of Asia”) Agro industry (“Kitchen of the World”) Fashion (“Regional Fashion Hub”) High VA services (healthcare, spa, tourism…)  (Electronics and ITC)  (Energy and renewable energy) Note: Ministry of Industry (MOI) and Board of Investment (BOI) have different lists. The last two are only in BOI’s list. Tourism is a separate category in MOI’s list.

Comparison of General Policy Orientation Thailand Vietnam Decision making style

Top down from PM with ministries to work Bottom up with final PM approval out details

Integration Localization policy

Aggressive Step by step Abolished in 2000; no preference for firm nationality Will abolish after entering WTO; desire to promote VN firms

National positioning

Domestic VA and market niche; several industries targeted Not clear; several industries listed in Five-Year Plan

Topic 3

Policy Formulation with Private Sector Involvement

Prime Minister Policy direction to be concretized

 Order

--Master plan --Implementation --Monitoring --Adjustment Relevant Ministry

Industry-specific Committees

Direct inputs Private Sector

Industry-specific Institute

Experts

Industry-specific Institutes

 Recently Thai Gov’t established 9 institutes (automotive, electronics, textile, steel…)  Key functions: - Coordination among gov’t, private sector, experts --Supporting services (training, testing, etc) --Policy research  Can they really play useful roles?

 Required to become financially independent after 5 years (possible? desirable?)  Crowd out private consultancy & research?

Industry-specific Government Committees

 Attended by relevant policy makers and top managers of private firms  Meet frequently (every 1-2 months)  Policy design, action plans, implementation, adjustment, trouble-shooting  If new issues arise, sub-committees are set up to solve them  Information is shared and decisions are supported by all concerned

Master Plans for Individual Industries

Drafting process —about one year; PM approval is not required Joint process

Private Sector Private Sector Explain Market info, targets Policy concerns, measures Thailand Automotive Institute Coordination & drafting Policy Makers Submit Thai MOI Government & Prime Minister Report

(Official author)

Master Plans (contd.)

 Private sector proposes numerical targets  Thailand Automotive Institute (TAI) provides coordination and drafts M/P  Budget, projects and technical assistance are specified in implementation  Private sector, government and TAI continue to cooperate closely in implementation, monitoring and adjustment

Five-Year Plan

The Ninth National Economic and Social Development Plan 2002-2006



Drafter

--National Economic and Social Development Board (NESDB)  Contains broad socio-economic concerns Good governance, human resources, social protection, environment, macroeconomy, competitiveness, science & technology  Some say that Five-Year Plan is no longer needed under top-down Thaksin Government

Tentative Evaluation

 Private firms (local & foreign) seem happy with government’s responsiveness  Thai MOI and related bodies feel that policy making is now faster and more integrated  However, some think actual implementation is more difficult than PR and frameworks

Design and Execution of Industrial Policies Thailand Private-gov't cooperation Numerical targets Industry-specific committees Industry-specific institutes Five-year Plan

Active and ongoing with many channels Proposed by private sector Regularly meet to draft and implement policies Established for nine industries; expected to play pivotal roles Provides general vision but without budget implication

Vietnam

Channels are not well developed yet Government decides targets Do not exist Many exist under ministries but policy role remains weak Key document for budget & project allocation

Topic 4

Automobile Master Plan

 Recent Thai automobile boom --Output and exports rising strongly --From import substitution to export orientation --FDI makers upgrade Thailand to global supply base  Reasons --Favorable reassessment of Thailand after strong recovery from Asian crisis --Decisive trade & FDI liberalization under WTO, AFTA, FTAs  Remaining problems --Weak human resources (engineers, managers) --Weak technical capability of local SMEs

ASEAN Auto Market Size, 2003

Million vehicles per year 1 0.8

0.54 mil +0.21 mil export Export 0.6

Domestic 0.4

0.2

0 0.043 mil --Thai auto industry has developed over 40 years --This year, Thai auto output is expected at 1.1 million

Automobile Production

Million vehicles 1.2

1.0

Thailand

0.8

0.6

Asian Crisis 0.4

0.2

Vietnam

0.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Prel.

Sources: Vietnamese automobile master plan (Sep. 2004); Thailand Automotive Institute website; author’s estimate.

Auto Price Comparison, 2004

1500cc sedan in capital city

50000 40000 30000 20000 10000 0

With full implementation of Special Consumption Tax increase by 2007

Source: JETRO,

The 14th Survey of Investment-Related Cost Comparison in Major Cities and Regions in Asia

(March 2004).

Note: The dotted grey area corresponds to JAMA simulation under the full implementation of SCT increase by 2007.

Thai Auto Master Plan 2002-2006

 Drafted, executed and adjusted jointly by private sector and government  Drafting period: about one year  Autos, trucks and motorcycles are covered  No revision (constant adjustment makes it unnecessary)  Next M/P to be drafted this year, with same methodology but new targets

Thai Master Plan Contents

1. Analysis of global situation 2. Analysis of domestic situation 3. Strengths & weaknesses of Thailand 4. Vision/goal  Numerical targets 5. Strategies- Business Intelligence Unit, HRD, market expansion by FTA, good governance, infrastructure, clusters, supply chain, standardization, technology, management 6. Detailed action plans

VDF Proposal (Feb. 2004):

Suggested Master Plan Contents

Japan designed industrial policies like this. Thai auto M/P has the same structure.

What is the current global situation?

What is our position in the world economy?

What is the domestic situation?

What are the key national goals?

Action plan A Action plan B Action plan C Action plan D

Thai M/P Targets for 2006

 Auto production: 1 million  Export 40% of auto production  Motorcycle production: 2 million  Export 20% of motorcycle production  Export high-quality parts, 200 billion baht  60% Localization (target, not forced) Note: expected results for 2005 already exceed these targets: Automobiles--production (1.1 mil), export (0.42 mil) Motorcycles--production (3 mil), export (0.8 mil) Parts export (220 bil baht)

Comparing Auto Master Plans Volume Thailand

About 300 pages

Vietnam

63 pages (PM approval 15 pages) 2010 with a view to 2020

Period

2002-2006 (same as 5YP)

Broad vision

To become a "Detroit of Asia" Contribute to industrializa- tion & modernization, cope with integration, use high technology, etc

Numerical targets

Production, export and localization For entire industry only

Action details

Matrices containing action plans, indicators, etc. for 180 pages

Designation of producers

No For each category of auto 7 policy measures over 3 pages, to be concretized later 4 SOEs, 2 ministries, 3 regions named

Topic 5

SI and SME Promotion

After 40 years, Thai local industries are still weak

Part Procurement of Thai Auto Industry

Local firms 25% Low-tech parts FDI firms in Thailand 45% High-tech parts

Raw Materials Used by Parts Industry ALL IMPORTED

Imports 30%

Information by Nomura Research Institute, July 2004

Measures for SMEs

   Training centers & courses Testing facilities (for autos, product quality…) Formation of “clusters”  --SMEs working together to produce “Train Factory” system --Big FDI firms teach local SMEs  Critiques say these are not enough; gov’t should do more to improve local capability

Topic 6

Glass Ceiling Problem

  Industry promotion under protection is no longer permitted today BUT…is complete openness consistent with leveling up of industries?

 No ASEAN country has internalized industrial management & technology, unlike Korea or Taiwan  Is more aggressive policy necessary even under WTO and FTAs? In what way?

VDF Presentation (Feb. 2004):

Breaking the “Glass Ceiling”

Agglomeration

STAGE ONE

Simple manufacturing under foreign guidance Vietnam Technical absorption

STAGE TWO

Have supporting industries, but still under foreign guidance Thailand, Malaysia Creativity

STAGE THREE

Technology & management mastered, can produce high quality goods Korea, Taiwan

STAGE FOUR

Full capability in innovation and product design as global leader Japan, US, EU

No ASEAN countries have broken through the invisible barrier between Stage Two & Three.

Possible Lessons

 Vietnam can learn from Thailand --National positioning & strategic marketing --Channels to work closely with the private sector --Making institutes & committees work better --Hints for master plan contents and procedure  Vietnam can also learn from Thai weaknesses --Internalize technology !

--Improve human resources for industrialization !

 These are long-term goals. There should be properly targeted efforts from the early stage of industrialization

THE END